Banking & Finance

Credit where it’s due

China agrees debt restructurings, although critics say more are needed


China is a major lender overseas

“Simply untenable” was the rebuttal from China’s foreign ministry last month to the latest round of warnings about Beijing’s ‘debt trap diplomacy’ from US Secretary of State Antony Blinken.

Allegations like these infuriate the Chinese government, which says that private lenders in the West are responsible for the majority of poor-nation debt and that they charge higher interest rates.

But Chinese officials are also doing more to showcase how they are willing to respond to situations in which debtor countries are struggling, like Monday’s announcement from the Ecuadorean government that it had reached a deal on $1.4 billion in debt service relief on loans from China Development Bank and the Export-Import Bank of China.

The savings come from a combination of extending the loans’ maturity and cutting some of their interest rates, while state-owned energy company Petroecuador has reached a separate deal with PetroChina on oil deliveries that frees up more than $700 million more in funding.

The restructuring follows news in August that Beijing has forgiven 23 interest-free loans to 17 African countries. Although details are scant on the value of the loans retired or the nations that owed the money, academics at Boston University estimate that the plan probably amounted to between $45 million and $610 million in relief, or about 1% of what the continent owes China.

That makes the write-offs pretty insignificant, some critics say. African governments also tend to treat no-interest loans more like grants than borrowing that needs to be repaid, so the forgiveness programme isn’t going to move the dial on their financial position.

Concessions on China’s other loans typically come in the form of maturity extensions or new lending rather than fuller forgiveness. But supporters of the African write-offs will argue that any relief is better than nothing in freeing up resources for poorer nations.

The same kind of approach hasn’t been as apparent for some of the loans related to China’s Belt and Road Initiative, however. Pakistan and Sri Lanka – two major recipients of funding for BRI infrastructure projects – have spent months trying to renegotiate the terms of previous financings with the Chinese, for instance, as well as asking Beijing for a new round of emergency loans to get them through their current fiscal crises. Both countries have also approached the IMF for emergency support, although a wider restructuring effort from the international community will need approvals first from Beijing on the Chinese share of their debt.

Brent Neiman, a counsellor to US Treasury Secretary Janet Yellen, stepped up the criticism of the Chinese this week at an event hosted by the Peterson Institute for International Economics. There have been only four cases since 2000 in which China has agreed to take a haircut on official loans, he claimed, while another major problem is its reluctance to engage in debt relief coordinated with other lenders.

The Chinese did join a series of negotiations that resulted in the release of a new $1.3 billion loan to the Zambian government from the IMF last month, he acknowledged, but Beijing has dragged its feet in discussions with other governments, delaying the delivery of much-needed help.

The Chinese are hardly unique in wanting to focus on getting the best deal for their own lenders. But the sheer scale of their loans mean they have an essential role in many restructuring processes, Neiman points out, citing claims on debtor nations that surpass the World Bank, International Monetary Fund and all Paris Club official creditors combined. Estimates of outstanding official loans from the Chinese are now between $500 billion and $1 trillion, mainly to low and middle-income countries, with as many as 44 nations owing debts equivalent to more than 10% of their gross domestic products to the Chinese.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.